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Pensions news: 15 December 2015

Pensions News was reading the FT last weekend. The reader will appreciate that PN isn't showing off by saying this; PN is leading up to an endorsement of a recommendation made by one of the FT's less staid journalists. The journalist in question stated that it was, in her view, worth spending £9.99 on a secret Santa parcel. PN noted that the parcel came in three versions; one for when the present presenter knew that the recipient was male, another for when the purchaser knew the recipient of the secret Santa present was female and, finally, a third, neutral version for when the purchaser didn't know the sex of the recipient.

What really interested PN was the fact that the unknown presents had been "crap-wrapped" meaning that they had been very carefully wrapped to look as if someone such as PN had wrapped them. PN wraps his presents up in a way which is, according to some, characteristic. In wrapping the presents he has bought, PN normally uses enough wrapping paper to cover three presents or else enough paper nearly to cover one. PN compensates for miscalculating the amount of paper he has cut by using half a roll of tape for each present. The makers of the secret Santa presents had clearly thought of PN when designing their presents.

It is possible to pay someone to wrap one's presents. Indeed, the firm that pays PN's wages put such an operation in to action in order raise money for charity a couple of years ago and PN happily handed over presents to be wrapped for his loved ones. The problem with this was one which PN really should have foreseen. The thing with PN's loved ones is this; they are aware of PN's present-wrapping abilities so that, when presented with perfectly packaged presents, they were smart enough to guess immediately that PN had not wrapped them himself. The point, the pith or the festering seed of this introduction is that anyone good at wrapping things up can easily wrap things up well and that person is going to be especially good if wrapping the present is as or more important than the present itself. A professional wrapper-upper will be superb at wrapping presents perfectly but it takes a special kind of talent to wrap things up badly or at least in a way that will convince a recipient that his/ her present has been wrapped with the care and attention which (for instance) PN would take.

So it is that the present Government has wrapped up certain reforms with the sort of packing which has been seized on by many journalists to tell us that we have "pension freedom". We will, we are told, be able to take our pension as cash if that is what we want. If we don't, we can have something called "draw-down" or else we can (if we really want to) buy an annuity.

Then there is the complexity that surrounds the state pension. The confusion around this vexed question will be resolved too so that we do not have to think about the basic state pension and something else which Mr Gordon Brown renamed "S2P" (state second pension) as increasingly few people could remember what SERPS stood for (state earnings related pension scheme). Subject to certain conditions (we are told), we will be able to draw a flat rate state pension which will, eventually, rise to the equivalent of £152 per week. For those who feel they may lose out through the reformed, simplified state pension, those people may buy what many are calling a "cheap annuity"; a mere (the reader will understand that PN is now using an adjective another journalist attributed to this offer) £22,250 will buy an additional state pension of £25 a week (yes; that's twenty five, two, five of your British pounds reader). Many recipients of this news have been dazzled by the wrapping, bewitched by the sparkly metaphorical ribbons that go around it (ribbons that could actually be red tape) and have pronounced this a good deal. "Pension freedom and a simpler state pension" AND we can enhance the latter. Merry Christmas. What could go wrong?

PN has already commented on the consequences of the pension freedoms in previous issues of PN. The consequences are mainly (i) the increased risk of falling victim to sharp practices (so-called pension liberation scams) and (ii) tax. There are (particularly nasty) tax consequences of putting too much money in to a plan or accumulating too much over one's lifetime and it is the Government (through HMRC) that is in control of the meaning of "too much". In case anyone was still wondering, the Government has shown itself to be keen on exercising that control. The annual allowance was introduced in 2006 and was up to 100% of one's pay up to a maximum of £360,000. The current annual allowance is £40,000, due to fall again next year. The consequences of the Government's continued reduction of the annual allowance (just to be clear and for the benefit of those rolling their eyes at more jargon, the annual allowance is the amount of money that you and PN are permitted to put in to a pension scheme each year without adverse tax consequences) will hit higher earners not ready to read and digest small print. The annual allowance is set to decrease from £40,000 (per annum) to £30,000 however there are tapering provisions which apply to anyone fortunate enough to be earning over £110,000 (that could be many of the clients of this firm and several of the readers of this piece). Those individuals will, in reality, be able to contribute £10,000 in to a pension scheme in each tax year. Any more than that and contributions will be taxed. So; contributions taxed on the way in and then benefits taxed on the way out when paid in the form of a pension. Clearly, pension freedom comes at a price. Perhaps it's the cost of all that wrapping.

If the person decides to take the entirety of his/ her pension as cash, the current regime says that that's fine. The first 25% of the value of the pension will be paid tax free but the rest will be taxed at the person's marginal (income tax) rate. So; let's say that Eric Anorak (a quiet man who invented a sensible coat and known to readers of PN) has a rash moment. Someone has told him that his pension account, which has £120,000 in it, is his if he wants it. Eric says "yes please" and, as he is 56, he is entitled to draw on it. Eric gets his hands on £30,000 tax free. "Thanks very much" he says as he needs to pay off the credit card bill he has built up to keep going during the 3 year recession which ended up going on for 7 years. The remainder of the pension money is taxed at Eric's marginal income tax rate which is 40% meaning that he gets £54,000 (in addition to the £30,000 tax free) and hands over (without really doing it, he just never actually sees it) £36,000 to HMRC. "No Mr Anorak; thank YOU" says Mr Osborne as he presses a large button on an enormous cash register.

What about the cheap annuity comment with reference to the state pension?

PN read another article in the FT about this and agrees with the substance of that article. The piece in the FT suggested that the so-called cheap annuity wrapping is, in fact, just that; glossy wrapping to cover over what is, in reality (in PN's view), a poor deal. The main reason for the enhanced state pension purchase being a poor deal is tax. If (let's say) poor old Eric Anorak, a bit sore from parting with so much cash after the example above, decided to enhance his state pension, he could pay £22,250 to the Government to achieve this. He would then be entitled to a higher state pension (higher by £25 a week or the equivalent of 12 to 13 packets of Jelly Babies. Jelly Babies........mmmmm....). The sharper readers (this, of course, is all of PN's readership) will notice straight off that Eric is almost certainly going to pay for his enhanced state pension out of taxed income. Normal pension contributions, up to the annual allowance, are tax efficient and not taxed on their way in to the scheme. As pensions are taxed as income once they come in to payment, Eric is going to be taxed twice; once on the way in and again on the way out when Eric comes to receive it. So; not such a good deal - in PN's view.

If someone with the present-wrapping skills of PN hands you a perfectly wrapped present, the chances are that it's been wrapped by someone other than that person. Put differently, be suspicious. It may mean that the wrapping is there to distract you from what's actually inside. Sometimes, the offeror needs to do this. Perhaps partly because of this, PN understands that wrapping a present can be very important. In some cultures, not to wrap up a present before presenting it is the equivalent of hitting the recipient over the head with it. PN got that message when, one year, he offered one of his daughters a book which was still in the bag in which it had been placed at the bookshop. The fact that the book was a very good book ("Mansfield Park" by Jane Austen of anyone's still reading) was apparently immaterial when placed next to the fact that daughter's father could not be bothered to wrap it. Transpose this idea to policy and shiny new laws (PN thinks that the use of the term "pension freedom" really should have tipped us off) and it starts to look as though wrapping up something as unlovely as the current regime was clearly very important to the Government.

This year, PN will be investing in the services of a professional present wrapper who will, very carefully, wrap presents as if PN has wrapped them. Believe PN when he tells you that it takes a lot of skill to wrap a present as badly as PN does. Provided nobody sees the receipt for the services after PN has paid, PN's loved ones will not or should not notice what has happened. Perhaps the present wrapper should then be sent to the Government as a present. Does the reader think the irony will be understood? Dial 5755 and say so if you think so. Dial 123 if you don't.

In the meantime, wrap those presents carefully and have a calm, peaceful and jargon free Christmas.

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